Now we have done VAT whats next?

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OK, that’s VAT sorted now lets do ITSA

MTD – VAT is clearly happening, Income Tax Self Assessment (ITSA) is next.  Even though many businesses have not yet joined MTD, most firms of accountants are coping well with MTD VAT.  A few are having problems with multiple authorisations because they have not got software that handles being authorised for 18 months properly. Many are not yet using monitoring software to give detailed management control.  However, MTD for VAT is happening.

In the mean time work proceeds on MTD for Income Tax Self Assessment (ITSA).  Unlike VAT, where just the 9 boxes of VAT 100 are being submitted in a different way, there are changes with ITSA.  ITSA is, in fact live, but only for a limited range of taxpayers.  If you have a taxpayer who has one self employment and/or income from UK property then they may be able to sign up for ITSA.

The authorisation process for software and the links to the ASA are much the same as with VAT, but obviously with different “scopes”.  Scopes are the areas of authority given to MTD software by a user.  For reading vat the scope is read:vat  for writing vat the scope is write:vat.   Self assessment is read:self-assessment and write:self-assessment.  I have done a video about scopes if you want to see more about this which is here:

https://www.youtube.com/watch?v=pyGGIRgKMfU

Like VAT, ITSA does not involve giving a list of transactions or any documentary evidence.  In fact although ITSA does require digital records, it does not require that the backup documentation is stored online.   However, ITSA goes into more detail than the SA100-SA105 forms.

ITSA also asks tax payers to submit a summary of business income and expenditure on a quarterly basis.  This is perhaps one of the more substantial shifts from the current reporting process.  It has the advantage that rather than having one big deadline at the end of January there are several smaller deadlines. Also it means that managing tax liabilities will be easier in that the amount of tax due will be estimated on an interim basis.

I would expect that the requirement will be similar to VAT in that digital records are required before a return is submitted.

ITSA will not prevent people from using spreadsheets and bridging software.  

Self Assessment is a lot more detailed than VAT.  Hence MTD for Income Tax has to be more detailed than MTD for VAT.

Some taxpayers have a wider set of sources of income than others. Hence their tax records are also more detailed.

A basic self employed taxpayer will have one self employment.  That self employment then has quarterly submission obligations although the taxpayer can submit periods within those obligations.  The information submitted is much the same as SA103 there is also an abbreviated submission as well as a more detailed submission (where expenditure is divided into the normal SA103F boxes)

If you have a landlord who has rental property then there are quarterly submission obligations associated with this property income.  It is a bit more detailed in that there is a separate submission for furnished holiday lettings and other property.   It is important to note that this is an area in which more detailed analysis is required compared to SA105. 

For example box 6 on SA105 (Rent paid, repairs, insurance and costs of services Provided) is divided into separately analysed totals for Premises Running Costs, Repairs and Maintenance and Cost of Services.

Similarly travel is separated out from other costs for both FHL and Other Property.  Also the rent a room relief is separately reported for FHL and Other property.

None of these changes are particularly difficult to handle, but it is important to note this in advance as the source analysis system (which could be a spreadsheet or could be an accounting system) needs to have separate accounts for all of these costs.

Hence if a taxpayer has Self Employment and property there could be two or three separate submissions a quarter.

This is a logical thing to so as the information could come from different sources and collating it on HMRC’s servers is a good way of bringing the information all together. Unlike VAT there is a mechanism in software for submitting an amended quarterly update (for self-Employment, FHL or Other Property).

The process of formalising the return as a whole is also different to now.

Once all the information is submitted for the business and/or property income the taxpayer needs to confirm this with an End of Period Statement.

Once the End of Period Statement has been submitted the taxpayer (or their agent) must submit any information related to their ‘personal’ tax affairs. ITSA is currently testing facilities for handling UK Dividend Income, bank interest and Charitable giving, with others to be added in future.  These, however, are submitted on an annual basis rather than a quarterly one.

The taxpayer (or their agent) then needs to ask HMRC for a final tax calculation and they then “crystallise” the tax return (which is equivalent to signing the tax return and submitting it to HMRC).

The process of implementing ITSA is a lot more challenging for HMRC as it needs to be linked into HMRC’s back end systems.  Hence not all of it has been written as yet which limits the numbers of taxpayers who could use it at the moment.  It is, however, important to note that it is currently live and self employed taxpayers with a simple set of tax records can join the system.

The Agents API also works for appointing agents for taxpayers who wish to use agents to submit their ITSA information.

My recommendation for agents was to have a single VAT account which they put into MTD at an early stage simply to learn the procedures.   I have the same recommendation for ITSA.  Agents should try to identify a single taxpayer whose situation is relatively simple that they can use for learning the procedures and making sure that when ITSA starts accelerating (when Brexit issues are resolved, if that ever happens) they are able to surf the front of the wave rather being swamped in confusion.

The debate will continue about the merits of MTD.  It seems clear to me that MTD has the potential to reduce the tax gap.  Because failing to have digital links will be clearly intentional the excuses people have had historically for errors in their favour will be seen as intentional rather than careless. 

People’s experience of MTD Vat has varied.   Our clients have had minimal costs or zero costs other than their own time.  People who are used to MTD now take probably less time to do their Vat submission than using the gateway used to take.

MTD also allows taxpayers and their agents to automatically manage their status in terms of HMRC submissions.  Cirrostratus do this with a summary email at a given frequency (weekly for agents if they wish) so our clients don’t even have to log in to the server to be sure that things are working properly and they are up to date.  This will, of course, be the same with ITSA.

Agents who use the Agents API will find they can be far more responsive to their clients with it taking less effort and significantly less time than posted codes or using form 64-8.

If we are going to have digital tax then MTD is a lot easier than SAF-T with submitting lists of transactions to the tax authorities – the approach Poland and Italy have taken.

MTD ITSA is considerably more technically complex and many providers may decide that it is not worth their investment in developing the interfaces particularly when companies like Cirrostratus are offering API services at utility prices or lower.  Hence there may not be as many providers in the market as has been the case for VAT (currently at least 470). 

The UK is also some distance off making it mandatory although if we assume that the Brexit issues will be resolved some day it will happen in the near future.

In the end it needs to be recognised that the vast majority of taxpayers do things properly, but there always have been some who don’t.  Other people have to jump through hoops in order to ensure that everyone follows the law.  Twas ever thus.

If you are interested in finding out more about MTD ITSA and using the test interfaces then email me at [email protected]

 

 

Further notes:

The eligibility criteria are set out here:

https://www.gov.uk/guidance/agents-use-software-to-send-income-tax-updates.

Approx 1m customers are currently eligible to join.  

There are some help and support videos here:

https://www.gov.uk/guidance/help-and-support-for-making-tax-digital#making-tax-digital-for-income-tax